2.Prepare a cash flow summary for the following investment proposal Service life

Question

2.Prepare a cash flow summary for the following investment proposal

Service life                                                                         8 years

Recovery period                                                                  5 years

Depreciation method                                                        Accelerated

Purchase price                                                                      $9700

Installation and shipping cost                                         $ 300

Change in net working capital                                        $ 500

Annual revenue                                                                   $8000

Annual expense: years 1 through 5                             $3000

Annual expense: years 6 through 8                             $5000

Estimated salvage value                                                   $2000

Tax rate                                                                                   40%

Explanation / Answer

Service Life (Years) 8 Recovery Period (Years) 5 Purchase Price 9700 Installation and shipping Cost 300 Total Cost 10000 Less: Salvage Value 2000 8000 Depreciation Per Recovery Period 1600 Year 0 1 2 3 4 5 6 7 8 8 Purchase and Installation Cost -10000 Annual Revenue 8000 8000 8000 8000 8000 8000 8000 8000 Annual Expense 3000 3000 3000 3000 3000 5000 5000 5000 Net Income 5000 5000 5000 5000 5000 3000 3000 3000 Salvage Value 2000 Tax @ 40% 2000 2000 2000 2000 2000 1200 1200 1200 Net Income after tax 3000 3000 3000 3000 3000 1800 1800 1800 Add: Deprecaiation 1600 1600 1600 1600 1600 0 0 0 Cash Flow -10000 4600 4600 4600 4600 4600 1800 1800 1800 2000

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